Complete Text of Letter
NRLN Urges Rejection of Portman-Cardin Bill Provisions Altering Funding Assumptions So That Companies Can Reduce Their Contributions to Their Pension Plans
NRLNs President A.J. Norby Warns That Corporate Executives Will Take Advantage of Relaxed Funding Rules To Boost Their Pay And Bonuses While Placing Their Pension Programs In Jeopardy
(WASHINGTON, April 21, 2003)
TEXT OF LETTER
I am writing on behalf of the National Retiree Legislative Network (NRLN) to urge that you unequivocally reject a provision in the recently introduced Portman-Cardin bill, H.R. 1776, that would substitute a composite long-term corporate bond rate for the current temporary four year weighted average of 30-year Treasury bond rates for purposes of fixing the contributions companies must make to their defined-benefit pension plans under ERISA. This controversial replacement interest rate formula is found in section 705 of H.R. 1776.
NRLN is a 2 million strong grassroots retiree and older workers nonprofit organization established about two years ago to pursue legislative and regulatory reforms that provide greater safeguards to the health and pension benefits that employers have promised to our members. We are deeply concerned that enactment of section 705 will further undermine the already shaky funding of existing defined benefit plans and provide another pretext for high-ranking corporate insiders to enrich themselves at the expense of pension plan participants and beneficiaries.
As already reported by Mary Williams Walsh in the New York Times of April 11, 2003, section 705 would artificially wipe out billions of dollars in projected pension liabilities, making it seem that the plans were more financially healthy than they really were, and justifying further increases in executive pay and bonuses because of the false appearance of corporate profitability that resulted from the reduction in pension funding obligations. Following on the heels of cash balance conversions in which thousands of older workers were swindled out of the high-grade pensions they were due to earn, and the almost annual occurrence of corporate-directed post-retirement reductions or cancellations of retiree health benefits both of which by themselves led to an undeserved upsurge in financial benefits for high-ranking corporate officials NRLNs membership regards section 705 as another phase in an Enron-like charade by corporate America to cover up its incompetent and ethically obtuse management of employee benefits.
The fact of the matter is that just a few short years ago the companies now pleading for a section 705 bailout were sitting on huge surpluses in their defined benefit plans and had taken funding holidays for close to a decade, never contributing a penny to their plans. Even assuming that the interest rate replacement formula incorporated in section 705 has merit, would it not be prudent for Congress to ask whether the surplus pension funds that have now vanished were managed and invested in accordance with the high fiduciary standards required under ERISA? Would it not be advisable to make sure that those companies that mismanaged their employee pension funds are not perversely rewarded with weaker funding obligations?
Even on merits, both the Executive Director of the Pension Benefit Guaranty Corporation (PBGC), Steven A. Kandarian, and GAO have questioned the appropriateness of using the replacement interest rate technique specified in section 705.
Mr. Kandarian testified before the Senate Finance Committee recently that further study was needed to determine an objective interest rate approach to replace the interim four year weighted average of 30-year Treasury bond rates due to expire at the end of this year. He made it clear that the objective should be to get a reliable and accurate standard, not just one whose dominant purpose is to provide greater funding relief to employers.
Moreover, on February 27 of this year, GAO issued a report (GAO-03-313), which concluded that the use of long-term corporate bond rates as a substitute for the 30-year rate had certain distinct disadvantages. Among these were that the corporate bond market was not as liquid and transparent as the Treasury bond market because it is segmented by differences in credit quality and issuer characteristics. In addition, certain corporate bond indices possessed characteristics and complexities that could affect suitability as a replacement rate because of differences among financial companies in how publicly they share information on which bonds they include in an index, how they weigh component interest rates, and other factors.
As an alternative, GAO noted the possibility of using rates based on securities issued by government-sponsored entities because they have received a credit rating comparable to, or exceeding that, of insurance companies, and, therefore, may approximate group annuity purchase rates. While unlike Treasury securities, other government-issued securities are not considered credit-risk free, they are of sufficiently high quality so that using them would result in a replacement rate that was lower than the corporate rate specified by Portman-Cardin but higher than the current 30-year Treasury rate.
Although NRLN is not prepared to endorse the use of a government securities rate as a replacement rate without further study, it is clear to us that the co-authors of H.R. 1776 not only swept the GAO report under the rug, but caved in to corporate lobbyists demanding the replacement rate that would reduce their funding obligations by the biggest margin. This type of sweetheart legislating presents a mortal danger to the funding adequacy of the defined benefit plan system, to the health and stability of PBGC, and to the rebuilding of public trust and confidence in employer-sponsored pensions, which has been shattered by all the Enron-like manipulations of company pension funds.
Even assuming that there are a substantial number of companies whose businesses would be damaged unless they obtained some form of immediate funding relief, and even assuming further that all of these companies properly handled their pension fund investments before landing in the ditch, it is unclear why such companies could not get the relief they need under the funding variance provisions in ERISA Section 303, 29 U.S.C. §1083 and Internal Revenue Code Section 412(d). In the case of demonstrable temporary substantial business hardship, the minimum funding requirements can be waived for a maximum 3 of any 15 consecutive plan years (5 of any 15 in the case of multiemployer plans), or the Secretary of Labor can be petitioned to extend the funding amortization period for up to 10 years, which has the effect of lowering the annual funding contribution burden borne by the employer. In our view, it is premature to rush to judgment on the need to enact the replacement interest rate proposed by Portman-Cardin without first determining whether these funding variance provisions in existing law would provide all the relief necessary to deal with the funding problems that have been raised.
Rather than explain why they think the funding variance provisions are inadequate, it appears that instead the corporate lobby supporting section 705 of Portman-Cardin have made threats as to what they will do if section 705 is not enacted. These threats include putting a freeze on future benefit accruals under their defined-benefit plans. This type of action, of course, would sharply reduce future funding burdens.
Congress should take every step to resist these brass-knuckle intimidation tactics. If, on the merits, Congress rejects section 705 of Portman-Cardin, it should enact a tax-penalty of at least 50 percent of the funding contribution for any year in which the employer has reduced future benefit accruals and did not seek and obtain a funding variance. If a replacement interest rate for the 30 year rate is enacted, whether the section 705 version or another, Congress should also enact a tax-penalty of at least 50 percent of the funding contributions for any year in which the employer provides increases in executive pay or bonuses that are linked, directly or indirectly, to the reduction of the companys annual funding obligation caused by use of the new replacement interest rate. Americas workers and retirees are sick and tired of corporate insiders inventing pension rip-off schemes to feather their own nests.